What is Rule Of 72: Meaning, Example, Uses & Limitations

What is Rule Of 72: Meaning, Example, Uses & Limitations

A straightforward and practical financial concept called the Rule of 72 can be used to calculate the length of time it will take to double the amount you invest at a specific rate of return. It is an effective tool that may be utilized to make well-informed investment and long-term planning decisions.

In this post, we'll define whats  the Rule of 72 is, show you how to apply it, and discuss some of its drawbacks it has in the online share trading. Know all about it in this article 

Rule of 72 Meaning & Example

The Rule of 72, a simple and useful financial concept, can be used to determine how long it will take to double your investment at a particular rate of return. It is a useful tool that may be used to make educated judgments about long-term planning and investments.

This article will outline the Rule of 72, its formula demonstrates how to use it, and go through some of its disadvantages.

For instance, let’s consider a rule of 72 example, suppose it will take roughly 12 years for a deposit with a yearly return of 6% to reach double in value (72 x 6% = 12).

Here's another illustration. The time it will take for a stock to double in value if the annual interest rate is 10% is roughly 7.2 years (72 x 10 = 7.2).

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Table of Content

  1. Rule of 72 Meaning & Example
  2. How to use the Rule of 72 & its Formula?
  3. Limitations of the Rule of 72
  4. Conclusion on Rule of 72

How to use the Rule of 72 & its Formula?

It is possible to calculate how long it will require for an investment to grow to double in value using the Rule of 72, but it's crucial to remember that this is merely a calculation. Several variables, such as the rate of interest, the frequency of compounding, and the length of time the investment is held, will affect how long it actually takes for an ownership stake to double in value.

You must be aware of your investment's annual interest rate in order to apply the Rule of 72. This can be a return on a mutual fund's investments, the rate of interest on a savings account, or any other investment that generates income.

To find the total amount of years it needs for the investment to grow by twofold in value, divide 72 by the yearly interest rate after you have it. For instance, it will take roughly 9 years (72 x 8 = 9) for your investment to grow by twofold in value if the annual interest rate is 8%.

Limitations of the Rule of 72

The Rule of 72 is a valuable tool for determining when an investment will double in value, but it is crucial to be aware of its limits. The fact that it presumes a constant rate of return is one of its main drawbacks. It is actually challenging to anticipate how long it will take for a stock to double in value because the rate for return on a given investment might vary over time.

The Rule of 72 also counts on annual compounding of interest. The actual time it takes for a stock to double in value will be less than the estimate provided by the Rule of 72 if interest is added up more regularly, such as monthly or daily.

Conclusion on Rule of 72

A straightforward and practical method for determining how long it takes for a stake to double in value is the Rule of 72. You may quickly determine how long it will take your money to double by dividing 72 by the yearly interest rate. 

The Rule of 72 is merely a guide, so it's crucial to keep in mind that there are a number of variables that might determine how long it actually requires for an investment to grow to double in value. Learn about the rule of 72 in stock market and how to utlise in the above article.

Rule of 72 FAQS

Any investment that generates compound interest, including deposits for savings, stocks, mutual funds, and bonds, may be used in accordance with the Rule of 72.

Although it is not always precise, the Rule of 72 offers a good estimation of how long it will require for a stock to double in value. The accuracy is based on the fixed rate of return assumption, which isn't always true in real life.

Negative interest rates do not fall within the Rule of 72 because the result is a negative number of years, which is illogical.

The Rule of 72 might not be accurate if an investment's interest rate changes over time. In this situation, it is preferable to determine the future worth of the investment using more complex financial models.

No, the Rule of 72 does not take into account taxes or other investment-related costs, which may have an impact on the true return on investment.

The Rule of 72 is merely a forecast based on assumptions, so it does not represent a promise of investment results. Real investment returns could differ depending on a number of variables.